Posts Tagged ‘foreign exchange’

Hedging your forex?

If you hedge your foreign exchange you basically protect your self agains future movements of the exchange rates. An importer for example can fix his exchange rate against future increases of the currency he is using while importing goods. A certain fee is payable to fix your exchange rate at a certain level in the future.

The advantages are that the importer can predict the cost of goods he imports and is protected against weakining local currency. The disadvantage is that it might have been cheaper to buy the foreign currency at the going exchange rate at the time.

The opposite is for exporters who sell in a foreign currency.

Basically hedging is an insurance against volatility in the exchange rates, with the risk that the exchange rate does the opposite as you expect so besides being an insurance it can be seen as a gamble as well.